5.
Why did the regulators and the external governance structure, such as the market, fail to
monitor SVB’s not-so-hidden risk-taking?
Silicon Valley Bank was a risk assessor’s worst nightmare, and everyone asked how another
financial institution's failure occurred right in the forefront. The Dodd-Frank Wall Street Reform
and Consumer Protection Agency Act (Dodd-Frank Act) was enacted to prevent future financial
institution failure with increased oversight and regulation. Financial institutions required stress
testing during its early implementation if the assets exceeded $50 Billion. Silicon Valley Bank
(SVB) and its holding company, SVB Financial, exceeded the regulatory threshold two times
during its enactment. In 2017 and 2018, SVB assets were $51.21 Billion and $56.92 Billion each
respective year, which exceeded the regulatory threshold of $50 Billion. Under the Dodd-Frank
Act, SVB should have been assessed for a Comprehensive Capital Analysis and Review (CCAR)
liquidity review since a significant portion of its customer base was technology start-ups and
venture capital firms with fluctuations in income. SVB also held a significant portion of its
investments in long-term bond securities. SVB did not undergo any CCAR stress testing or
receive increased monitoring or oversight as its assets increased.
In 2018, sections of the Dodd-Frank Act were repealed. The Economic Growth, Regulatory
Relief and Consumer Protection Act (EGRRCPA) was entered into regulation in May 2018. The
new threshold for supervision regulation was now for financial institutions that exceeded $250
Billion in assets. Even with the new regulatory threshold, SVB remained underneath it. SVB
assets for 2020, 2021, and 2022 were $115.5 Billion, $211.5 Billion, and $211.8 Billion for each
respective year. Supporters of the EGRRCPA believed that banking institutions that fell under
the threshold were less prone to systemic risks and should not have the same level of regulatory
scrutiny as those financial institutions whose assets exceeded the threshold. Therefore, the new
threshold for regulations thus allowed SVB to continue conducting operations without
governmental oversight or supervision. SVB continued to secure more high-risk investments and
acquire more long-term bond securities.
Despite being a US-based financial institution, SVB also adopted the international
framework under BASEL III to assess financial stress and heightened risk management. Under
BASEL III regulation, institutions must maintain a Capital Adequacy Ratio (CAR) for Tier 1
capital of 8.5% and total capital of 10.5%. SVB ratios were above the baseline metrics. In
December 2022, SVB ratios were 15.4% and 16.18%, respectively. Although SVB exceeded the
capital requirements expectations, it ultimately failed in the liquidity metrics risks. CAR
primarily focuses on capital strength, and liquidity risk was not a pivotal focus. In the wake of
these regulatory absences, SVB continued to grow aggressively, which made it vulnerable to a
bank run.
5a. How can the incentives for the external monitors be improved?
In order to improve the incentives for external monitors, there has to be a common goal or
objective that both parties must meet for desired long-lasting financial stability. A compliance
board or committee that ensures the rigid testing is completed for all financial institutions
regardless of asset value. There will be a need for enhanced supervisory authority to interfere
when financial institutions display signs of unnecessary risk and dependency on uninsured
deposits. In addition, external monitors should be held accountable for assessments of financial
institutions. This added level of accountability will encourage persistent evaluations and
disclosure of adverse warnings. There should be penalties for negligence for external monitors
and protection whistleblowers.
5b. How are the incentives affected by the federal deposit insurance system?
The federal deposit insurance system has weakened incentives for external monitors to
monitor financial institutions so they can operate more efficiently. In addition to the low
insurance limit, financial institutions can take on more risks to increase their capital base without
any immediate repercussions. As we have seen with SVB, it has created a moral hazard.
Nevertheless, customers are less likely to scrutinize financial institutions' actions when deposits
are under the federal deposit insurance threshold. This oversight has led to a shift from external
monitors to federal regulators, who have not enforced stricter stress testing guidelines or assessed
liquidity risks. SVB remained under the regulatory threshold despite its high-risk investments
and dependency on customer's deposits.
6. The unrealized losses on AFS and HTM securities were identified as early as in the SVB
quarterly earnings report in the third quarter of 2022. Why did the bank run occur almost 6
months later?
Although SVB disclosed its unrealized losses in its quarterly filings, it took a significant
time for the market and its customers to understand and rationalize the magnitude of the losses.
Since there was no regulatory oversight, there were no external monitors to signal a warning of a
bank run to the market or SVB’s customers publicly. As the rates increased by the Federal
Reserve, SVB was placed in a very complex position. The value of its Assets for Sale (AFS) and
Held-To-Maturity (HTM) securities declined significantly. SVB's financial positions worsened
as news began to spread about its liquidity. Customers whose balances were over the federal
insurance limit began to withdraw funds at an alarming rate, thus resulting in SVB selling its
security holds. However, this attempt resulted in a $1.8 billion loss, which was announced
publicly by SVB.
A significant portion of SVB's customer base was technology start-ups and venture
capitalists who were already struggling due to the rise of interest rates. As news spread regarding
the solvency of SVB. The venture capitalist community began advising its respondents to
withdraw their funds from SVB. These advisements led to panic, and the widespread panic made
its way to social media outlets. As a result, a bank run was sparked. In the short time frame of 48
hours, a $42 million withdrawal requests was made to SVB. This tipping point caused SVB to
disclose its liquidity restraints publicly.
Works Cited
Harvard School of Business. (2025). Governance Lessons in Silicon Valley Bank's Failure. Retrieved from
Harvard School of Business.
Congressional Research Service. (2023, March 28). Silicon Valley Bank, Signature Bank, and P.L. 115-174:
Part 2 (Issues Surrounding Thier Failures). Retrieved from [Link]
[Link]
%20only%20recently,(i.e.%2C%20liquidity%20risk).
Cox School of Business. (2025). Coxtoday Magazine. Retrieved from Cox School of Business:
[Link]
%20fact%2C%20SVB's%20balance%20sheet,third%20quarters%20of%202022%2C
%20respectively.